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Introduction: A new perspective Hong Kong has traditionally been a very important source of China’s foreign exchange earnings. Prior to the 1980s, generally about one-quarter to one-third of the country’s hard foreign currency earnings were generated from exports to Hong Kong. Tiny as the British enclave may be in geographic terms, and with a population of only six million, it has nonetheless always been a very important market for China’s food and food-processing industries, as well as textile and clothing manufacturers. Sales to Hong Kong have earned the Chinese government the bulk of the hard currency needed to Ànance her enormous import bills incurred with major Western suppliers of steel, machinery and high-tech products. This speciÀc role played by Hong Kong in Ànancing China’s industrialization programme is of course widely understood. Yet hardly any observers have come to realize that the bulk of China’s food and clothing exports to Hong Kong represent none other than Hong Kong’s wage outlay on labour inputs necessary for sustaining its production of exports, which are, as is well known, overwhelmingly destined for the major Western markets, the United States in particular. An intellectually interesting point may be made on this China-Hong Kong synergy: an essential part of Hong Kong’s foreign exchange earnings may itself be seen as China’s indirect export to the West. Viewed this way, there * Reprinted with minor adaptation from “The role of Hong Kong in Sino-American economic relations” (coauthored with Thomas Voon), in Y. Y. Kueh (ed.), The Political Economy of Sino-American Relations—A Greater China Perspective, Hong Kong: Hong Kong University Press, 1997, pp. 61–92. 5 The US Connection of Hong Kong in China’s “One Country, Two Economies” System* 110 Pax Sinica is obviously something wrong with the widely held view that in the case of a complete takeover of Hong Kong by its sovereign power, China would kill the “gold-laying goose” and forfeit all her direct foreign exchange earnings from Hong Kong. China has a pronounced interest in maintaining the economic status quo for Hong Kong—an interest apparent in the entire strategic design of the future Special Administrative Region under the concept of “one country, two systems”. The fallacy of this popular argument is clear enough. With a full-Áedged socialist-style takeover, the present foreign exchange earnings as held by Hong Kong’s exporters would, by implication, inevitably be entirely accruable to the government of the People’s Republic of China (PRC), after allowing perhaps for certain proportion of “transaction costs” incurred as a result of, say, impaired export incentives, reduced efÀciency and loss of competent marketing and sourcing expertise. It should also be clear that under such a complete socialist takeover, the present “direct” export earnings by China from Hong Kong would naturally become China’s own liability, that is, the input costs needed for sustaining the export earnings of Hong Kong. Interesting as the issues raised may be, intellectually speaking, we do not think it is worthwhile to pursue the matter further, because a socialist takeover of Hong Kong is clearly not on the agenda. Nonetheless, increased economic interaction and integration between Hong Kong and mainland China under the country’s open-door policy in the past decade has lent some new dimensions to their trade relations that seem not entirely irrelevant to the questions posed for a fully-Áedged political takeover of Hong Kong. At least to the mind of many Americans, Hong Kong seems to have already become part of China proper. Any re-exports from Hong Kong of Chinese origin should thus be treated by the United States as Chinese exports, be it in terms of most-favoured-nation status (MFN) renewal, protection of intellectual property rights or otherwise. Rightly or wrongly, what is at stake is particularly the tens of thousands of Hong Kong manufacturers who prefer to have their export production contracted out, by way of what Hong Kong government statistics term as “outward processing” (or what in ofÀcial Chinese parlance is referred to as sanlai yibu) to the Pearl River Delta basin, in order to avoid exorbitant land rental and labour cost pressures in Hong Kong.1 The relocation of Hong Kong’s export manufacturing activities to the Pearl River hinterland is not entirely dissimilar to a socialist takeover, because in terms of trading relationship and foreign exchange accruable, it has become The US Connection of Hong Kong...


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